Guidelines show start-ups how to price their service

Many new consultants and other professionals offer a quality service, but do not know what hourly rate to charge. If they moved from a corporate position, they may know the equivalent annual salary they want or need to maintain their lifestyle. But they might not know how many hours they actually can charge clients, and they probably do not know what expenses they will incur.

As a result, they may bid too low and leave money on the table, or they may bid too high and lose contracts they should be awarded. Some local consultants have benefited from using a simple spreadsheet program to identify annual costs and calculate a consulting or service rate.

The largest single expense is salaries and fringe costs. In the chart (at right), for example, hourly salary rates of $20, $30 and $40 are used. These rates convert to $41,600, $62,400 and $83,200, respectively, and represent a typical salary range.

What are the costs other than direct salary? Either as an individual or as a corporate entity, the professional is responsible for FICA (Social Security) on the first $65,400 of income. The cost is 6.2 percent, and is matched by the employee and company, or 12.4 percent for the self-employed. Medicare is an additional 1.45 percent of the entire salary, matched by the employer.

Other fringe costs, called "benefits" when working for others, include health insurance, workers' compensation, disability, federal and state unemployment tax, and pension contribution.

If a person has his or her health insurance covered by a former employer as part of an early retirement package, or if covered under the policy of a spouse, there may be no cost. For most professionals, the cost for a family plan can translate into $5 per hour in their fee. If they are paying health care costs for support staff, and if these costs are buried in the hourly rate, the total health care cost could be $7 per hour.

Like health care expenses, there are many costs that may or may not apply to sole consultants or professionals: clerical, office rent, computer capital costs, entertainment, professional society dues and meeting expense. If these expenses apply, they can vary significantly, particularly in the first year.

In addition, all professionals incur expenses for office supplies, including stationery and business cards, telephone, postage, transportation, accounting and legal fees, and minimum taxes. Many professionals use subcontractors, at a discounted fee. This expands the billable hours and effectively decreases costs. The chart provides typical annual cost ranges.

In itemizing costs, it is essential to determine which costs will be passed through as billed expenses, and which costs will be in the hourly rate. For example, some consultants will charge 31.5 cents per mile to travel to and from the client; others will charge as much as 45 cents to offset non-billable travel costs, and others will bundle this cost into the hourly rate.

If bundled, the cost could be double the amounts in the table. Other costs that can be passed through or bundled include clerical support at $20 to $30 per hour, computer time, long-distance telephone charges, and mailing costs, particularly overnight service.

As an example of the impact of mileage, if a consultant drives 15,000 business miles annually and charges 45 cents per mile, this is $6,750 of billed expense. If bundled, and if the consultant bills 1,100 hours annually, this is $6.14 per hour that the consulting rate must be increased.

A key factor is that no consultant or professional can spend all of his or her time on billable activities. The individual still wants vacation, holidays and paid sick time. If this is 30 days, you only have 230 days annually, or 1,840 hours left to bill. However, you cannot bill all the time. You have to market your services and spend time on administrative activities, attend professional society meetings and take continuing education courses.

A typical target might be 60 percent of the professional's worked hours, or 1,104 annual hours. As shown in the chart, the total salary cost per billed hour ranges from $48.10 to $100.64, before expenses. This is 2.4 to 2.5 times the basic hourly rate of pay.

Expenses add another $6,850 to $47,320 annually, or $6.20 to $42.86 per hour. Therefore, the total cost per hour ranges from $54.30 to $143.50, before any profit for being in business. Add a 10 percent profit, and even with minimal expenses, the person who wants to make $20 per hour has to charge at least $60 per hour.

As a guideline, the professional has to charge three to four times his or her hourly salary to cover all salary and expense costs. If the individual has high annual costs for support staff, professional fees and the like, he or she may have to charge five times the base salary.

Some professionals with established practices may be able to bill 75 percent of their worked hours. They can decide to make a higher salary at the same hourly rate, or can lower their rates to be more competitive and keep the work flowing. At 75 percent, or 1,380 annual billed hours, the hourly rates range from $48 to $126.

Most people going into business for themselves are over confident regarding their ability to obtain and sustain work. As a result, they do not spend enough time marketing. They also underestimate costs. By using a spreadsheet to estimate annual billed hours and costs, they can avoid charging too low an hourly rate, and can avoid over-pricing to emulate the larger firms.

Templin is president of Templin Management Associates Inc., a Greenfield Center health-care management consulting firm. He also is president of the Capital District-based Consulting Alliance, a 40-member consulting organization.